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Cash Is King in a Depression… Just Ask the Mafia

Many people are aware that the mob made a fortune in illegal alcohol due to Prohibition in the Roaring ’20s.

But most aren’t aware of how they made their greatest profits during the Great Depression: They became loan sharks.

One of the rising mob bosses was “Lucky” Luciano in New York. With the help of Meyer Lansky — the ultimate financial genius, also called the “Mob’s Accountant” — and the infamous Bugsy Siegle, he implemented a strategy that helped the mob thrive during one of the worst downturns in history.

It was a simple matter of supply and demand. When the Depression hit, people and businesses couldn’t get loans. So the mob took the money they got from bootlegging and started lending it out at shark rates of 20%-plus.

To put it in perspective, that’s similar to what credit cards charge over-spenders with questionable credit today!

The mob was able to enforce these high rates for one simple reason — they were the frickin’ mob!

It’s not that people and businesses didn’t have previously existing loans from the banks. Some even got money from relatives and other lenders. But they can’t kick your ass and break your legs like Luigi can!

So who do you think got paid first? That advantage reduced their risk in a high risk period.

And even when borrowers couldn’t cough up the cash after breaking their legs, the mob just took a chunk of their business to create future cash flow for when the economy ultimately turned around again.

So not only were these mobsters raking in high cash flow from high interest rates, they were taking over businesses in dynamic growth cities like New York when they were the cheapest they would ever be.

Lending high and buying low — it’s the perfect winter season strategy.

Just think about how Joseph Kennedy made his family fortune during the same period. He made much (if not most) of his money bootlegging in the ’20s, then sold his stocks in late 1929 when a shoe shine boy started giving him tips — a sign that speculation had really gone berserk!

Finally, when the stock market went down by as much as 89%, he reinvested that money. With that cash, he bought the bargains of a lifetime in financial assets when no one else did, and few could.

Think about it: He became so successful, he switched from an illegal business to a legal one and even had a kid become President. He went from near-mob to a royal family.

I’m not telling you to break people’s legs or start an illegal business venture to make money! I’m telling you how powerful a depression can be if you have the cash and cash flow to take advantage of it.

But cash isn’t the only strategy the mob used. They also practiced the delicate art of consolidation. And they did it during a winter season, when market share shifts long-term to the largest and most efficient businesses (legal or illegal) while most fail.

Coming out of the Roaring ’20s, the top crime boss in New York was Joe Masseria. For awhile, Lucky Luciano worked under him. But there was a new ruthless up-and-coming mob boss that came to America when Mussolini started locking up anyone even suspected of being in the mob in Italy.

In New York, Luciano “took care of” Masseria to get closer to the new rising boss — Salvatore Maranzano, from Sicily. And when Maranzano got greedy and refused to share the top spot as promised, Luciano killed him too. That’s what I call consolidation!

With Meyer Lansky and his new mob family, Luciano became the “Godfather,” or “boss-of-bosses” in New York… like Michael Corleone in the infamous Godfather movie (which, mind you, has facts mixed with some fiction, but it’s characteristic over the same time period).

Luciano was driven by greed and power. But in practical terms, he consolidated his illegal industry during the most economically trying period of the 20th century.

That’s not all — he created a new long-term mob empire and growth path for decades to follow, by being stronger when everyone else was getting weaker.

So what can you learn from this as we get closer and closer to the next great depression?

Sell financial assets, speculative real estate, and parts of your business you don’t dominate now. Do it ahead of the next crash which could start as soon as this summer and accelerate in 2016.

In your business, focus on your strongest sectors. Now’s the time to get lean and mean. Doing this should darn-near guarantee you’ll survive and out-live your competitors. And you’ll make money doing it, too — in the short term, but even more so over the long term.

There’s an old joke: “If a bear is chasing you, you don’t have to outrun the bear, just your friend.” That’s what the bear market and winter season is about — narrowing the economy down to the strongest and most efficient competitors.

Finally, do what you can now to protect your income and financial assets from rising taxes. They’re sure to come, especially in the next two administrations.

One way to do that, is sell highly appreciated financial assets before the government raises capital gains taxes to ordinary rates. Those rates will only rise in the years ahead for the more affluent.

Our country is about to face some hard economic choices. Seeing them coming before they happen will help you protect your income, your retirement, and your cash. Rodney goes in depth into this in July’s Boom & Bust, which we release Monday.

Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.